Young investors often think investing is boring, and if forced to invest are attracted to very simple strategies like buying “the Market” via VOO.
VOO is an excellent investment over the long term, but the long term can be very long and naive investors can easily bail if they don’t understand what they bought.
We are at a point now when market enthusiasm is at a peak making it possible that today’s young investor will face a long period of mediocre returns.
A brief TL;DR summarizes what young investors must know before they invest in the market via VOO.
ekkawit998/iStock via Getty Images Just this last week a young relative contacted me wondering what to do with a large amount of cash that had accumulated in their account over the past couple years. Up until now, my young relative had shown no interest in investing. They have a very demanding and time-consuming job and, like many young people, they thought that learning about investing would be an unpleasant chore, very much like filling out tax forms.
But inflation has picked up to where even my oblivious relative had noticed that prices were soaring at the grocery store. They had also just noticed that a money market fund, which had been paying over 2% just a few years ago, was paying nothing and that they could not find CDs paying anything to replace matured CDs.
So my relative wanted me to tell them, in as simple terms as possible, how to invest their cash so that it would keep up with inflation. Should they just put it into an index fund that tracks the stock market like the Vanguard S&P 500 ETF ( VOO )? I’ve been mulling over how to answer ever since. Naive Investors Want Simple Investing Solutions
I’m sure that as soon as you got the reputation among friends and family of being an astute investor you also faced this same question. And I’m also sure that if you tried to give a thoughtful, well-reasoned answer you’ve seen your questioner’s eyes glaze over very shortly after you began.
The truth is that while people those who read articles on Seeking Alpha daily find investing fascinating, a large part of the world sees investing as just another hobby embraced by enthusiasts that is utterly boring to everyone else.
That’s why when they ask you what to invest in, most people just want an answer no longer than a sentence or two. Anything longer affects them the way a scene-by-scene analysis of the new Dune movie might strike you if you don’t enjoy SF or how you might feel when a friend launches into an inning by inning analysis of what is wrong with Red Sox pitching when you don’t follow baseball. You just want to know if the movie was any good or if the Sox are going to win another World Series.
So with that in mind, I knew that I’d have to keep my advice to my young relative short and very simple. And what is shorter and simpler than telling them, “Yes, buy VOO?”
It’s not a bad answer. Study after study has confirmed that few investors, no matter how skilled can consistently beat the performance of the S&P 500 over a period longer than 10 years. We are all familiar by now with Warren Buffett’s famous advice to his stockholders , “My regular recommendation has been a low-cost S&P 500 index fund.” And we know he put his money where his mouth was, too, when he made a million-dollar bet with hedge fund managers that, over 10 years, he could beat their results simply by owning an S&P 500 index fund – which he did.
So Investing in VOO could be a perfect solution for people who are forced to invest but don’t want to “waste” their valuable time studying the ins and outs of investing. It’s Not Quite that Easy
What keeps me from giving that advice and letting it go at that is this: I was given that same advice back in the 1980s when I, too, assumed that investing was something only elderly bores found interesting. I even followed that advice. There was only one problem: I had no idea what an index fund really was and how it might behave. So when the market plunged 20% on “Black Monday” in 1987, it scared the pants off me and I stopped investing.
You might just shrug and say, “Well, you were an idiot. Lots of people held on […]